A Smoother Ride

By Bryan Borzykowski /
June 2016

Les Grober discusses this year’s market volatility and how Investors Group’s Maestro Portfolios can help weather the market storms.

What we’re waiting for now is to see earnings rebound. Earnings took a steep dive alongside weaker oil prices, but they look to be on the cusp of moving higher. And we need that to happen for the markets to break out.

Back in January many financial experts were predicting an imminent recession. Equity markets at home and abroad dropped by roughly 10 per cent that month, oil prices were plummeting and investors were worried. Since then, fears have subsided and equities have recovered, with the S&P/TSX Composite Index now up about 7.5 per cent since the start of the year.

No one can be certain where things go from here, but Les Grober, Senior-Vice President and Head of Asset Allocation for Investors Group, and manager of the company’s Maestro Portfolios, says we are in for a more volatile time than we have been in the past. More spoke to Grober about why we’re seeing higher volatility and what investors can do about it.

Why did we see so much volatility earlier in the year?

It had a lot to do with the rapid decline of oil prices in late 2015 and early 2016. A lot of companies, especially in the energy sector, rely on stable to higher crude prices to operate well. Widespread corporate difficulties, in turn, put pressure on bank balance sheets. People were worried about weak global growth and the possibility of another recession.

But markets have come back.

Two things happened. Riskier assets, like equities, high yield credit and even commodities had priced in a high likelihood of an economic downturn and then had to revalue upward when a global recession didn’t materialize. There was also a lot of fear around the Federal Reserve raising rates for the first time last December. Once the market had the opportunity to digest this it rebounded. As for oil, there’s been a supply response to the lack of demand, so that’s helped stabilize the fundamentals of the oil market.

Where do we go from here?

What we’re waiting for now is to see earnings rebound. Earnings took a steep dive alongside weaker oil prices, but they look to be on the cusp of moving higher. And we need that to happen for the markets to break out. This is taking place against a backdrop of weak economic growth. Nevertheless, commodity prices have about doubled since February and that will have a positive impact on earnings growth, certainly in Canada, but also in the U.S. We’re also seeing a weaker U.S. dollar and that helps North American earnings, too.

Are we still in a bull market?

I think we are still in a secular bull market. We’ll see a number of cyclical corrections, but ultimately earnings will recover and equity markets over time will move higher. So we’re sticking with our preference for equities over fixed income, particularly in this low interest rate world. We think a mid-to-high-single digit return expectation is appropriate going forward.

Your Maestro Portfolios are supposed to help smooth out this volatility. How?

The Maestro Portfolios are a fund-of-funds solution that is designed to provide investors with a greater strategic weighting in equities without the corresponding risk that you’d normally have from investing in global equity markets. It works because we have a higher weighting in low volatility equity funds. We recognize that investors will probably have to rely on equities more heavily to provide income and capital gains today, so we want to have that strategic weighting in stocks, but we want to do it in a reasonable and responsible way.

How do you identify low volatility equities?

We mostly use a quantitative process to identify stocks that exhibit less volatility than the broader market. What we’re trying to do is create a portfolio of companies that, over time, deliver similar returns to the broader market, but with less overall volatility. We look at things like, does a company have stable earnings and cash flow? Does it pay a dividend and grow it over time? Does it have a healthy balance sheet? We also look at other fundamental factors that tend to dampen the ups and downs of stock performance. About one third of the weight in our Maestro Portfolios – there are three of them – is in low volatility equity funds. This is for those who want to be invested in equities, but don’t want the ups and downs normally associated with it.